My name is Nic Madsen, a senior business administration major at Morningside College in Sioux City, Iowa. Currently I am working on a senior research project to evaluate the pros and cons of investing in multifamily rental properties vs single family rental properties. I have future plans to sell commercial real estate, while investing in multifamily and residential rental properties. I need your help, what do you believe are the top three pros/cons or benefits/risks of investing in multifamily and residential rental properties?
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
7y
Nick:
Good luck in your project.
I think you may want to start with three categories, rather than two.
Single Family
Small Multi Family (plexes 2-4 units)
Large Multi Family (apartments 5+ units)
Single Family and Plexes all can be financed using conventional 30 year mortgages. Their valuation is usually done with Comparative Sales Analysis (comps). As a result, these are more like each other and different from Apartments. However, there remain some key differences.
Apartments, are valued based on the income approach, so the way you run the business is a bit different. They should be separated out.
Even within the apartment category, there are key differences.
Financing on smaller apartments can be harder to find. Often you have to use a regional bank or credit union. You typically cannot get agency debt (fannie / freddie) until you get somewhere over a $1M purchase price.
From a management perspective, small apartments cannot afford full time staff. Property management on small apartments eats up a lot of the profits. You need about 100 units to afford a full time leasing agent and maintenance guy.
There are also major differences if you get into senior housing, low income housing, tax credits, etc.
The class of apartment is also a key driver of how you manage. A new, expensive apartment in a hip area may be one you want to re-decorate interiors frequently to keep it fresh, while an older property in workforce housing is more focused on clean and functional over style.